CREJ - Retail Properties Quarterly - May 2015
During first-quarter 2015, the overall leasing market, and specifically the retail leasing market in Colorado Springs, gave positive signals for the future. Turner Commercial Research reports that total absorption of office, retail and industrial space for firstquarter 2015 was 237,425 square feet – a 79 percent increase compared with first-quarter 2014’s total absorption of 132,307 sf. Total absorption in 2014 was 528,645 sf, so more than half of the total absorption from all of last year took place in first-quarter 2015. That is a good and much needed positive indicator for the Colorado Springs market. Retail absorption accounted for 21,559 sf of the total absorption reported. That it is a very positive sign for the Colorado Springs economy. Historically the retail sector posts a negative absorption number in the first quarter of the year because struggling retailers will stay open through the holiday season to harvest those high sales figures then close the business early in the new year. Because of this, normally retail creates a higher-than-average increase in vacated space in the first quarter annually. Total leasing activity of all categories over the first quarter was 582,779 sf. Retail leasing accounted for 182,165 sf, which beat leasing numbers from the first quarter of last year by 52,600 sf. The combined vacancy rate of office, retail and industrial fell 0.2 percent in first-quarter 2015, dropping from 10.8 to 10.6 percent overall. The vacancy rate in retail stayed about the same as it was at year-end 2014 at 10.4 percent for all retail centers. The market is still seeing continued progress from a year ago, as the retail vacancy rate for all centers in first-quarter 2014 was 11.5 percent. Colorado Springs saw a 1.5 percent decrease in vacancy rate of anchored shopping centers between first-quarter 2014 and the same period in 2015. The vacancy rate fell from 7.1 percent to where it currently sits at 5.6 percent. The southeast quadrant recorded a 10 percent reduction in vacancy of anchored centers over the same period. Nonanchored shopping centers showed a slight year-to-year difference in vacancy rate, as it was 1 percent lower in 2015. However, the overall vacancy rates are much higher in these centers – 18.4 percent in 2014 and 17.4 percent this year. The northwest sector of the market had a 9 percent decrease in vacancy of nonanchored shopping centers year to year. As mentioned in the previous Colorado Springs market update, specific shopping centers and certain retail corridors may have higher vacancy rates than the averages. However, there is a positive change in retail leasing activity in Colorado Springs that has occurred since the end of last year. Signs of improvement are visible at several shopping centers throughout the city – new tenants have opened up in long-vacant spaces, tenant finish is in process and new owners are making improvements to common areas of shopping centers. Making headway on the absorption of retail space in Colorado Springs is an important indicator that the market may be on its way to catching the wave of economic improvement that already has graced the metro area of Denver and the Northern Front Range. Sales prices of retail properties in Colorado Springs also have increased since last year. Turner Commercial Research said that 73 retail properties sold for an average price of $98.71 per sf in 2014 and 15 properties sold at an increased average price of $122.89 per sf in firstquarter 2015. Adjusted retail property sales have hovered around the $100 per-sf mark for the past two years. Speaking with appraisers in the market, capitalization rates on retail properties have averaged 8 percent on anchored, occupied shopping centers. Appraisers said that cap rates are somewhat lower for special properties, although not much lower, and cap rates are higher for unanchored and more vacant properties. When the current cap rates are compared with the 6 percent and lower rates that are common in Denver and other markets throughout the country, Colorado Springs retail investment properties continue to represent an opportunity for investors of all descriptions. Construction of all types always drives any economy toward improvement. Generally and historically, commercial construction lags residential construction. In Colorado Springs, residential construction was surprisingly flat in 2014 and is not forecast to improve much in 2015. Engineering News Record forecasts a slight, 1.5 percent increase in residential construction in 2015 in Colorado Springs. Builders and suppliers of residential construction products also agree with this forecast. But ENR forecasts a 52 percent increase in commercial construction for Colorado Springs this year – an increase that would take the city from $530 million in 2014 to $809 million in 2015. While most of the construction is forecast to be for users and not speculative construction, an increase in commercial construction of this magnitude will be good for jobs and income and, perhaps most important, will give physical indications that the market is improving, which will give consumers more confidence in the market and drive up retail sales. With positive first-quarter indicators in overall commercial space absorption and leasing, positive gains in retail absorption and leasing, opportunity in retail investment properties, positive forecasts for commercial construction and new leadership for the city (Colorado Springs will have a new mayor after a runoff election), Colorado Springs is poised for a successful year in the retail sector of its commercial real estate market and the overall economy.